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What is cryptocurrency?

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Cryptocurrency is a type of digital cash and is a bearer instrument. An old type of bearer instrument was a document that entitled the holder to the rights of ownership, such as shares, bonds, and cash money (coins and notes). Many bearer instruments are banned because of their potential for abuse, for example through tax evasion and money laundering.

The idea of digital cash has been around since the ‘90s, such as Digicash. But it never took off because all the systems relied on a trusted third party to facilitate the record of ownership and transfer. A third party that facilitates the record of digital cash makes it a non-bearer instrument and gives the third party a lot of power.

Figure 7 Bitcoin node vs. Waves node.

Cryptocurrency was developed by Satoshi Nakamoto as a way to prevent the holder of digital currency from sending it to more than one party. This is often referred to as “preventing double-spending”. In a centralized system, preventing double-spending is easy: the third party, for instance a bank, checks their record of ownership and disregards any fraudulent transfers.

The revolution that Satoshi began with Bitcoin in 2008 is a system that allowed the electronic transfer of digital cash without a central party checking its record of ownership. Satoshi developed a peer-to-peer electronic cash system.

The network collaboratively works to prevent double-spending and operates in much the same way as a network for file sharing. Every peer in the network has a list with all the network’s transactions. The peers check all new transactions to make sure they are valid and that there are no attempts to double spend the cryptocurrency.

A cryptocurrency is only a valid entry in a database. Cryptography is used to ensure a request to update the database is correct. There is a distributed network that enforces the rules around updating entries. Some blockchain networks have scarcity mechanisms such as mining that drive the perceived value of an entry. But the root of any cryptocurrency is to have only a valid entry in a database. Cryptocurrencies now have real-world value and can be traded for traditional currencies or directly for goods and services.

Introduction to Blockchain Technology

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